marriott

 

 

 

 

 

 

 

Case
 Study:
 Marriott
 Corporation
 

 
The
 Cost
 of
 Capital
 

 

 

 

 

 
Teresa
 Cortez
 
Keith
 Gemmell
 
Brandon
 Papsidero
 
Robin
 Reschke
 

 

 

 
October
 28,
 2013
 

 

 

 

 

 

Table
 of
 Contents
 

 
1.
  Are the four components of Marriott’s financial strategy consistent with its growth objective? ...................................................................................................................... 1  

2.
  How does Marriott use its estimate of its cost of capital? Does this make sense? ...... 3  
3.
  What is the weighted average cost of capital for Marriott Corporation? ..................... 4  
4.
  What type of investments would you value using Marriott’s WACC? ........................ 6  
5.
  If Marriott used a single corporate hurdle rate for evaluating investment opportunities in each of its lines of business, what would happen to the company over time? ......... 7  
6.
  What is the cost of capital for the lodging and restaurant divisions of Marriott? ........ 8  
7.
  What is the cost of capital for Marriott’s contract services division? How can you estimate its equity costs without publicly traded comparable companies? ................ 11  
APPENDIX I – Math Utilized to Derive WACC for Marriott .......................................... 13  
APPENDIX II – Math Utilized to Derive WACC for Divisions ...................................... 16  

BA
 626
 Financial
 Decision
 Making
 

 

ii
 

 

1.

 Are
 the
 four
 components
 of
 Marriott’s
 financial
 strategy
 consistent
 with
 
its
 growth
 objective?
 

 

 
The
  four
  components
  of
  Marriott’s
  financial
  strategy
  are
  to
  manage
  rather
 
than
  own
  hotel
  assets,
  to
  invest
  in
  projects
  that
  increase
  shareholder
  value,
  to
 
optimize
  the
  use
  of
  debt
  in
  the
  capital
  structure,
  and
  to
  repurchase
  undervalued
 
shares
 when
 necessary.
 

 
Marriott’s
  growth
  objective
  is
  to
  become
  the
  preferred
  employer
  and
 
provider
 in
 lodging,
 contract
 services
 (such
 as
 catering),
 and
 restaurants,
 and
 to
 be
 
the
 most
 profitable
 company
 in
 their
 industry.
 

 
By
  choosing
  to
  manage
  hotel
  properties
  instead
  of
  owning
  them
  Marriott
 
lowers
  their
  accounting
  assets
  on
  the
  books,
  therefore
  increasing
  their
  return
  on
 
assets
 as
 compared
 to
 owning
 the
 properties
 outright.
 This
 strategy
 also
 effectively
 
shares
  the
  risk
  that
  comes
  from
  the
  properties,
  and
  lets
  Marriott
  operate
  with
  more
 
liquidity,
  offering
  them
  the
  opportunity
  to
  relocate
  their
  hotel
  or
  restaurant
 
operations
 without
 the
 need
 to
 sell
 properties,
 for
 instance.
 

 
Marriott
 can
 analyze
 potential
 projects
 and
 discount
 the
 future
 cash
 flows
 to
 
determine
 which
 projects
 will
 have
 a
 higher
 net
 present
 value,
 and
 ultimately
 which
 
will
  be
  most
  profitable
  to
  Marriott
  at
  the
  present
  time,
  therefore
  increasing
 
shareholder
 wealth.
 

 
Balance
  sheets...